Successor Liability Can Hold Companies Accountable for Debts

A company that has extensive debts has many means by which it can attempt to avoid its creditors. One such way is when a second company purchases the debtor company and its assets. The debtor company often no longer has its own assets that its creditors can claim. Creditors may instead seek compensation from the second company that purchased the debtor company. However, Illinois law presumes that a buyer is not responsible for the debts and liabilities of the company it purchases. Business owners may try to abuse the law by essentially continuing to run a company under another name, while dodging creditors. Fortunately, Illinois courts allow creditors to claim successor liability in order to collect debts from successor companies. The creditor must prove one of four established exceptions that transfer debt liability to a successor company.

Expressed or Implied Transfer of Debt

Successor liability claims are most simple to prove when the successor company has a written or verbal agreement to assume the debts of the company it purchased. However, the successor company can also expressly state that it is not liable for the previous company’s debts. In some cases, the purchasing agreement does not mention debt liability. Creditors can examine the agreement to determine if there is an implied assumption of the debt. A court may interpret the assumption of a contract or obligation from the previous company to imply the assumption of other liabilities.

Fraud

The debtor company and its purchaser may be liable if they conducted the sale as a means of deceiving and avoiding creditors. Evidence of fraud usually comes from:

The timing of the sale;

Whether the company was sold for a fair price; and

Any connections the purchaser had with the company.

De Facto Merger

Though one company has purchased the other, they may be effectively merging with each other. The debtor company and its liabilities still exist within the purchaser company. Signs of company consolidation include:

Maintaining the same personnel, location, assets and business operations;

Continuation of the previous company’s owners or shareholders;

The quick dissolution of the previous company; and

An immediate assumption of the previous company’s obligations and contracts.

Mere Continuation

Similar to a de facto merger, continuation means that the purchaser is essentially the same company as the debtor company but with a new name. Illinois requires the new company to have the same owners as the previous company in order to establish continuation. Showing a continuation of other business practices and assets can strengthen the case.

Successor Liability

Because of the presumption against liability, the creditor must prove why a successor company should be responsible for the previous company’s debts. A Chicago creditors' rights attorney at Walinski & Associates, P.C., can help you prevent a company from escaping its debt. To schedule a consultation, call 312-704-0771.

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